CMF Issues Proposal for Identification of Systemically Important Banks

ByRegulatory News

CMF is consulting on methodology for the identification of systemically important banks and the determination of additional requirements for these institutions, in accordance with the international standards and the recent modification to the General Banking Law. The consultation runs until September 26, 2019. Additionally, CMF published a regulatory report that evaluates the impact of this proposal, a frequently asked questions (FAQ) document, and a presentation that summarizes the key elements of the consultation.

The new regulations consider construction of a Systemic Importance Index by entity, based on four factors that reflect the local impact of the financial deterioration or eventual insolvency. These factors are the size, interconnection, substitutability, and complexity of the institution. According to the proposed methodology, the process of identifying systemic banks and determining the applicable additional requirements will be carried out annually, based on the information that banks themselves must report to calculate the Systemic Importance Index.

With information as of December 2018, it is estimated that six banks would be rated as systemically important and, together, would require additional basic capital of nearly 2.5 billion dollars. Articles 35 and 66 of the General Banking Law empower CMF to impose greater demands on banks that are considered systemically important, including additional basic capital requirements (CET1) between 1 and 3.5 points percentage of risk-weighted assets, regardless of whether this condition is achieved by organic or inorganic growth (mergers and acquisitions). The proposed regulation is expected to enter into force on December 01, 2020 and the first resolution that qualifies the quality of systemic importance of the banks will be issued in March 2021, with information from December 2020.